Looking for the Bottom Line (by Ben Ford)

October 3, 2018December 1, 2018

Elon Musk Is Not Preston Tucker

It is well known among automobile enthusiasts that the U.S. Securities and Exchange Commission put the Tucker Corporation, maker of the famed Tucker Torpedo sedan, out of business in 1949. Later analysis revealed that the SEC engaged in significant prosecutorial misconduct, newspaper and magazine reporters sympathetic to the SEC engaged in significant unethical behavior, and a number of SEC witnesses provided testimony with an ax to grind more than with an eye to justice or truth. Nevertheless the SEC succeeded in destroying what was, before 2003, the only US automobile company that successfully developed a mass production model in the face of domestic competition from the established pre-war era US automotive industry. The SEC also succeeded in killing the reputation of founder Preston Tucker, whose worst crime was probably only a zeal to use any reasonable means to keep his company afloat, and relegated him to the dustbin of history.

The seminal event in 2003, of course, was the founding of Tesla Motors, Inc. (now just called Tesla, Inc.), the maker of the most successful line of mass produced electric cars since the very early part of the twentieth century when gasoline car companies like GM and Ford originally put electric car companies like Fritchle out of business. And unlike the Tucker Corporation, Tesla has designed and produced not just one model (the Roadster), but four (the Model S, Model X, and the Model 3), with three new designs on the way (a tractor-trailer, a pickup truck, and a new Model S). Thus while Tucker produced only fifty Torpedos, Tesla has manufactured in excess of one hundred thousand vehicles.

Tesla has proven to be as creative in its financing in many ways as the 1940’s era Tucker Corporation, including dalliances with solar panel maker and installer Solar City (which it bought in 2016). Musk’s tactics in raising awareness of Tesla and its way it raises funds has attracted the attention of the SEC over the years, although nothing proved actionable. That is until last month when Musk publicly mused (via Twitter) over the possibility of taking Tesla private. This proved to be too much for the SEC, particularly after the musing came to naught, and they filed fraud charges against Musk and Tesla.

While the SEC’s enormous resources was enough to doom Preston Tucker in 1949, Elon Musk represented an entirely different prospect. Musk was not in the same position as Dallas Mavericks owner Mark Cuban, a similarly wealthy businessman who waged a protracted battle against the SEC for five years that ultimately proved successful, because Musk is at the helm of a publicly traded company that relies on favorable publicity to raise funds and is at the helm of large private company (SpaceX) that relies on being able to do business with the US government. This no doubt factored in the SEC’s calculus in pressing charges in Musk’s case over what was merely a few tweets online, and for which did not enrich either Musk, the Tesla board, or Tesla itself. Nevertheless it was doubtful that Musk was in any significant legal hazard.

And in fact Musk settled the charges in two days, agreeing to a $20 million fine (with the Tesla board agreeing to another $20 million) and stepping down as chairman of the company. Musk still holds the position of CEO, the only position of any real significance as the the Tesla board is more than aware that few people other than Musk is capable of the necessary innovation and operating prowess that Tesla needs to stay in business. The new chairman will no doubt have veto power over critical financial decisions of the company, something which the SEC sought over all else and something that the board likely has felt for some time was necessary given the pressure Musk is under to deliver results.

The SEC’s case should give anybody involved with publicly traded corporations pause. Not too many executives could afford the $20 million Musk paid to get out of trouble. And while the SEC has been aggressively prosecuting insider trading cases, its foray into prosecuting corporate publicity is a troubling new trend.

It should also be noted that the SEC was willing to prosecute a domestic CEO for a tweet, but has not been willing to prosecute Chinese CEO’s of US-listed Chinese corporations for financial fraud and refusal to produce audit and financial records. It is a double standard that has little place in the US’ economic battle for global competitiveness.